I’m not easily shocked these days, but I have to confess I gasped out loud when I read that the former managing director of McKinsey, and until recently board member of Goldman and Procter & Gamble, Rajat Gupta, had been charged by the SEC for insider trading. Why would someone with one of the most blue chip reputations in Corporate America, who has clearly done very well financially, risk it all to make a bit more? Not only is the downside considerable, but it also isn’t as if these moves would have made a meaningful difference in his lifestyle. He already had status others would kill for. And passing profitable tips to Raj Rajaratnam was never going to be a ticket to Hedgistan levels of wealth.

But the next interesting bit was to watch the reaction in terms of what this scandal meant for McKinsey. This event was a Rorschach tests on the firm, often with a bit of schadenfreude at another elite name being shown to have feet of clay. And even though I worked for McKinsey over 20 years ago and think the firm has a lot to answer for, some of the charges are a bit barmy.

So let’s dispatch with the uninformed inflammatory stuff first and get to the real dirt. Barry Ritholtz (who I normally like) tried a drive by shooting that went wide of the mark: “Is McKinsey & Co. the Root of All Evil?’ His list of seriously bad ideas that McKinsey recommended to clients, including a strategy that led to SwissAir’s bankruptcy, its involvement in some of Enron’s creative accounting ideas, and its encouraging Allstate not to pay legitimate insurance claims, manages to miss their single biggest value destroyer: the AOL-Time Warner merger, the worst M&A deal of all time. (As much as McKinsey had some fingerprints on Enron, it was central in the AOL-Time Warner deal. It pushed the board to consider it five separate times).

But does it add up to Barry’s charge, “where ever there has been a financial disaster in the world, if you look around, somewhere in the background, McKinsey & Co. is nearby.” Um, no. McKinsey had nothing to do with the 1987 crash or the even bigger value destroying (but less widely publicized) 1994-1995 derivatives wipeout. And I have not seen anything to suggest it played an even secondary role in the global financial crisis. Big dealer firms tend to bring in McKinsey only in the down times; they are strongly of the view that they fact that they make so much more than consultants means they are clearly vastly smarter too, ergo there isn’t anything they could tell them that would be useful. The one exception is private equity, where McKinsey and Bain, to a lesser degree BCG, do a lot of work for the biggest buyout shops, such as KKR and TPG.

Andrew Haldane of the Bank of England has estimated that the global financial crisis cost between 1 and 5 times global GDP. Divide that across, say, 20 banks. McKinsey in its wildest dreams never had the clout to do that kind of damage. (Barry suggests a Taibbi type investigation, but journalists have been trying for as long as I have known anything about McKinsey to do a hit piece, and no one has succeeded).

So why the strong reactions now that McKinsey is in the spotlight? Some of it is no doubt that consultants in general and McKinsey in particular have managed to sail through this period of obvious widespread corruption among the governing and business classes looking clean by virtue of comparison. Bankers have suffered a well deserve plunge in their reputation; everyone knows all the Four accountants help big companies cheat but get away with it because the authorities see them as too big to fail; lawyers are generally not that highly respected, and even the white shoe types have taken a hit as Corporate America has become more mercenary. And McKinsey, by being preeminent but with many people mystified as to why, can quickly become a lighting rod. And that’s the real message of Barry’s list of really bad McKinsey recommendations: not that the firm is “the root of all evil” but a probable phony.

Now is that fair? Yes and no. It’s going to be easy to charge that I am so long out of the firm that I can’t possibly know. All I do is see some fellow ‘zoids at McKinsey alumni parties and get gossip once in a while from other sources. But much of what has happened over time to McKinsey is pretty easy to infer between the inherent problems with big strategy firm consulting and the way McKinsey has responded to economic and cultural changes.

To make a very long story very short, McKinsey was one the successors to a firm started by James O. McKinsey, an accountant, in the 1920s. The original consulting firms were industrial process specialists (time and motion studies were a big deal in those days). Marvin Bower, who more than anyone is responsible for McKinsey’s rise, who had a law degree and had worked at Jones & Day, thought the model was a law firm, to become a trusted counselor and adhere to professional standards. Bower stood for ideas like doing fact based analysis, providing objective advice, and telling the client the truth even if they might not like it. He would sometime sell studies by telling clients that if they didn’t think the work was worth it, they didn’t have to pay the bill. But this was in the day when no one “sold”; you’d build relationships, be visible in the community, publish articles and hold small group meetings to demonstrate intellectual leadership, and wait for the phone to ring. When I was there (the 1980s) that model was intact. The partners kept an “inquiry log” not a “calling list”.

Elite consulting firms had a clear value proposition back then. There were only a very few MBA programs seen as any good; there were not all that many MBAs in big corporations. And McKinsey and its peers were all much smaller then, and hired only from the top 10% of top schools. So even if they met a prospect that did have some MBAs, the firm was presumed to have an intellectual edge, plus its staff usually had a practical advantage by having experience in a broad range of industries on different types of problems and thus had a lot of tools and reference points that would be outside the client’s scope.

But let’s look at the conflicts and perverse incentives in this industry. Remember the lofty goal is giving fact based, objective advice, which by implication means without fear or favor. But the problem with consulting is you are hired by the problem. The relationship (not at junior levels, but between the partner and the client executive) has some elements in common with being a shrink. My impression was that most partners did not tell the unvarnished truth, but instead decided to dole out as much as they thought the client could handle. And some would be much more conservative on how much they doled out than others. As a consequence, the path of least resistance is to dispense what I like to call “leading edge conventional wisdom”.

And that leads to second-order problems. How do you know, to use that ambiguous expression so favored at McKinsey, that you are “adding value”? The truth is, as with therapy, most clients don’t get any better. Now the consultant can rationalize that by telling himself that in the absence of his involvement that the client would have done even worse. That might even be true. But within a year or so of being at McKinsey, I concluded you had to be cynical or deluded to be a partner there (being a engagement manager was actually a great job, but your end product was doing good studies, not trying to change client behavior).

And the business model is actually pretty crappy. Big consulting firms, like big law firms, make their profits by marking up staff time, and non-partner time can be marked up at higher premiums. So that means you have an incentive to carry overhead. And if you have overhead, you need to keep the fees coming in to keep the machine going. But consulting is project based. And capable clients, the sort that might use a consultant only if they faced a special challenge or change of circumstance, can bring a consultant in, be very happy with the work, and not have them back for a very long time. (Not being much of a baby sitter, I like capable clients and am not very good at selling, so I am acutely aware of this conundrum). So if you like working with on the ball managements, you will probably suffer from a lot of churn.

So that brings us to another big implication: The most profitable clients are the most diseased. And the corollary, as stated by a former colleague: McKinsey is in the business of propping up diseased managements. Now that will no doubt offend readers who think their companies are savvy and have still used McKinsey (and the private equity model isn’t terrible: the consulting firms serve as rental staff that gets no carried interest, plus is a marketing plus with investors, so there the concern that the consultant is an enabler isn’t operative). And if an industry is undergoing major change, you might see a good management team want help over a very long period of time. But when I was there, the firm was deep into General Motors (a huge team by the standards of that day), the old AT&T, for instance. I was on the Citibank team, where the client was smart and aggressive but often didn’t apply its energies to the best ends: the joke was that it was a “fire, aim, ready” organization.

There is an additional problem with the law firm model: its controls didn’t scale well. In a law firm, you don’t invite people to join the partnership unless you are pretty certain of their professional competence, their ability to bring in business, and their character. There is usually no supervision of partner work. The problem with that in a large consulting firm is you have a brand and need to have brand consistency. McKinsey achieved that to some degree via a lot of across firm staff training and “firm format” (secretaries were prohibited from producing documents that did not conform). But Goldman exercised far more supervision over partners than McKinsey did.

So, for instance, on a Treasury study in London, the partner announced that we were going to find a way to beat the foreign exchange market. And by the way, all we had was four months of end of day trading data in four currencies versus the dollar. When I proceeded to tell the partner this was not gonna fly (I didn’t even mention efficient markets, merely told him there were too few data point and it was the wrong data too, we’d need intraday prices from everyone in the market, not just our client, there was no way were were going to get that), I was deeded to have Bad Attitude. I concluded I had no interest in being a partner in a place that would allow partners to engage in obvious stupidity at client expense.

On a different axis of lack of supervision of partners, one of my buddies attended an alumni meeting for former partners not long after Enron went bankrupt. One of the participants asked, “How many of you worked with Jeff Skilling?” About a third of the hands in the room went up. Next question: “How many of your are surprised he was involved in something that did not pass the smell test?” No hands went up.

The firm was lax on some other fronts. One partner in my day completely made up data for a very splashy report published jointly with a Wall Street firm. And it was an obvious falsification to anyone in that field; the information was simply not obtainable. Yet nothing bad happened to him. Similarly, a guy on the verge of making partner was found to have charged personal tickets to Asia to the firm. At Goldman, a guy committing a similar scale offense (charging a closing dinner that never took place) was fired immediately. This fellow, who offered the dog-ate-my-homework excuse that his secretary has made a mistake, merely made partner a year later than he would have otherwise. He left the firm to work for a hedge fund….and paid the SEC $3 million to settle insider trading charges.

In the later 1980s, as pay on Wall Street escalated, the firm got into a panic as it began to have trouble recruiting from the top 10% of MBA programs and lot of mid level people left (I doubled my pay by quitting). It responded by figuring out ways to increase partner compensation (so the argument was that the lifestyle was not as awful as Wall Street, the work was more interesting, and directors, which was the tenured partner group, made a very nice living). The biggest was to raise the fees. The other was to get more serious about partner utilization rates (in the old days, less productive partners were simply paid less). Rajat Gupta was apparently a big mover on pushing the firm for more growth.

Over the next decade, I heard complaints about the quality of McKinsey work. I’m not certain it was any worse, but if you sell basically the same product for two or three times as much as it cost five years ago, customers will have higher quality expectations. But McKinsey has long had a big internal PR department; it was the sixth largest in the US in the 1990s, so that probably offset some of the image concerns.

The firm has also become very aggressive about selling work (Marvin Bower would be spinning in his grave). I’ve had executives give me long form accounts that I found appalling. Very much shortened version: McKinsey guy says; “Here is what we think you need and how we can help you.” Potential client: “Thanks, that’s useful input but we really think our challenge is Y and we are in the process of dealing with that internally.” McKinsey guy: “No, you really need us and here’s why.” Ahem, has no one told them the customer is always right?

A final tidbit: for many clients, the reason they hire McKinsey is not mainly to get the analytical work, but to get the advice of a director with whom they have a relationship. CEOs are isolated, and they don’t have many business savvy sounding boards they can confer with. But the deal at McKinsey is you can’t just get the director, you need to have an engagement (yes directors might have an occasional lunch with a CEO prospect, but there are limits to what you can get on the cheap and a counselor can’t be very useful unless he has a sufficiently in depth grasp of the situation). So the “consultant as therapist” can be the main driver for the relationship.

And that the real reason the Rajat impropriety has struck at the heart of the McKiney brand. He wasn’t just the head of a firm that did a lot of fancy studies; he was the counselor/confessor for a lot of CEOs. How would you react if you learned your therapist was a wifebeater or dealt drugs? You’d feel betrayed. That’s the same sort of visceral reaction that a lot of top brass had when they read about the charges against Rajat.

But this outcome is the inevitable result of the decay in morals that has taken place in a remarkably short time, via the mobility-induced erosion of relationships in workplaces and communities, and the promotion of values that place monetary success over standards of conduct. The people at the top of the food chain are now seeing that if loyalty to you is merely bought, you can always be outbid by someone else.

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This is all very interesting and probably largely true. Sooner or later, even you will realize that anointing a cadre of psychopaths whose ‘qualifications’ are a smart appearance, glib tongue and high scores on academic tests is not a useful leadership model. Indeed, we ought to consider data on how psychpathy correlates with performance on academic tests. Best and brightest, my ass. Law, consulting, accounting, banking all operate as giant cons. Management is the greatest con of all. Think about the nitwit idea that no corporation could possibly find anyone capable of being boss without allowing him (or her) unlimited rights to skim revenue and cadge mountains of free stock. Looks like time for a bottom up reorganization of economic life. I wouldn’t look to Harvard for salvation, either.

“The Management Myth” by Matthew Stewart offers a lot more illustrations of these points. Stewart was at Mitchell Madison (not mentioned in the book), which was populated mainly by ex-McKinseys – a few of whom ripped the rest off when it all imploded.

I worked at McKinsey, too. A few riffs on Yves’s points:

* McKinsey Director bonuses are contingent upon “impact” ratings. If a McKinsey Director is overseeing an M&A study, there’s no “impact” unless there’s a deal. Those perverse incentives have driven a lot more stupid deals than just AOL-Time Warner. The list is so long, its more of a commentary on the ineptitude of those who decide to become “reporters” than on the invincibility of McKinsey that no one has yet written the definitive “hit-piece.”
* On AOL-Time Warner, a bunch of the most idiotic McKinsey twits rode that merger into senior roles at “the client”
* One director I worked with on another project spent half her time one week trying to get an emerging whale into a particular country club, and his kids into a particular private school; Is it the therapist model, or the concierge model?

I met Bower once, when he was quite old, but still did the occasional firm event. He struck me as a principled guy. At the time, the firm still gave out copies of his book about the origins of McKinsey. By then, though, it was already a much different place – and not for the better – which is probably why they stopped that practice soon after…

Yves said: “But this outcome is the inevitable result of the decay in morals that has taken place in a remarkably short time…and the promotion of values that place monetary success over standards of conduct.”

For our so-called “elites,” it’s been full court press in the “promotion of values that place monetary success over standards of conduct.” There has been a well orchestrated campaign underway for at least 50 years to destroy morality in the United States.

Moral systems are interlocking sets of values, practices, institutions, and evolved psychological mechanisms that work together to suppress or regulate selfishness and make social life possible.

In Wealth and Democracy, Kevin Phillips argues that:

Corruption, like larceny, comes in many forms, some blatant, others more subtle. Booms, speculative heydays, and other periods of money worship bring the highest rations of both corruptions, the hard and the soft.

Speaking of the “soft” form of corruption, Phillips goes on to explain that:

Less obtrusive but at least as important [as hard corruption] has been the corollary corruption of thinking and writing—-the distortions of ideas and value systems to favor wealth and the biases of “economic man.”

[P]hilosophy and public policymaking during such periods [of money worship] has shifted to emphasize markets and Darwinian behavior and to find civic virtue in erstwhile private sins like greed, self-interest, and profligacy.

So who are the leading evangelists of money worship?

In the economics discipline, I would say the chronological succession of the leading lights of the “greed is good” school, also known as neoclassical economics, is as follows:

The original ideologue of Social Darwinism in economic policy (and pretty much in everything else) was Herbert Spencer. His ideas were immediately pounced upon by capitalists everywhere.

In the US the jurisprudential doctrine derived from it was called substantive due process, but only as instrumentalized in the form of: Anything that violates Social Darwinist economic license is unconstitutional. This was called the Lochner era, after the seminal SCOTUS case involving it. Although that was superseded as official SCOTUS doctrine in the late 30s, it still lived on in spirit, becoming informally but aggressively reinvigorated starting in the 70s. The chronologies you describe played a big role in that.

attempter many moons ago, when I first started posting here I corrected a few over their usage of Darwin with a link to IE: Herbert Spencer. To have one of the greatest leaps in human understanding, reduced to mythology like status, hijacked, completely misconstrued to validate the ideal of human ownership…is well…historically…par for coarse.

This has nothing to do with Rand, Dawkins, Dennett, Hitchens and Harris being atheists.

Richard Dawkins—-the militant atheist, and Pat Robertson—-the combative evangelist, are partners in crime, just like the Democrats and Republicans are partners in crime. The knock-down, drag-out battles between these protagonists are stagecraft, best thought of as being like professional wrestling: great entertainment but one shouldn’t mistake it for a real contest. Dawkins and Robertson, just like the Democrats and Republicans, are all on the same kabuki team. And the only effective critique of this orgy of selfishness and greed has come from atheists like Jonathan Haidt and David Sloan Wilson.

For more information on the starring role played in this orgy of self-interest by Rand, Dawkins, Dennett, Hitchens and Harris, whom as a group the atheist David Sloan Wilson calls the “New Atheists,” I recommend the article by Jonathan Haidt I linked above in my original comment.

Much, much more about the New Atheists and their glorification of self-interest can be gleaned from The Science Network’s “Beyond Belief” conferences which were held in 2006, 2007 and 2008 which can be watched here.

Furthermore, observe the starring role in proselytizing of the gospel of self-interest that Adam Curtis gives Richard Dawkins in the documentary The Trap, which can be seen here. Dawkins appears beginning at minute 26:00 in Part Two: “The Lonely Robot”.

Please provide sources for your claim that Dennet, Dawkins and so on advocate self-interest. A blurp from “The Trap” does not qualify as a source, as the segmenrt in question is an extremely poor misrepresentation of the insight Dawkins offers in The Selfish Gene. I’d also like to know which presentations in particular from the Beyond Belief conference contain a “glorification of self-interest”. I’ve whatched these several times over the years and detected no such thing.

Right now, I am simply assuming that you have never made an honest effort to actually undertstand what these people are talking about.

Your response is exactly what I would expect from an adherent of New Atheism: long on emotion and rhetoric, short on substance, and very dishonest. Undoubtedly you are a victim of organized religion and never got over it, and therefore harbor a great deal of pent-up anger and resentment. This bitterness clouds your judgment, and this sort of emotionally induced bias is exactly what the New Atheists prey upon.

Bigots thrive on stigmatization and scapegoating. “We all know what militant theists do,” you lash out. “They bomb women’s clinics, fly planes into buildigns, wage holy wars and so on.” Of course missing from this picture are militant theists of a totally different stripe, those like Ghandi, Reinhold Niebuhr and Martin Luther King, Jr. Also missing is the plethora of other motives that compel people to bomb women’s clinics, fly planes into buildings and wage holy wars. You make it sound like all one has to do to get people to do these things is fill their head with religion and send them on their merry way. It’s a little more complicated than that. There are other reasons why people do these things besides religion, and not all religious people do these things. This is of course something you would have learned if you had listened to the “Beyond Belief” conferences as you claim. Which is just one more indication of your dishonesty, and lack of perspicacity, because the conferences are right there for everyone to listen to and see for themselves how deceitful you are.

You say “A blurp from ‘The Trap’ does not qualify as a source, as the segment in question is an extremely poor misrepresentation of the insight Dawkins offers in The Selfish Gene.” Hogwash! It qualifies as a source, and an extremely good one, because it places Dawkins’ simplistic dogmas within a larger intellectual and moral framework and shows how, when put into practice, they result in social, economic and political disintegration. I also gave two other references, the article in Edge Magazine by Jonathan Haidt, which you elected to ignore, and the “Beyond Belief” conferences, which you chose to distort and misrepresent.

In the three references the case against New Atheism is extremely well articulated and documented. You, however, didn’t elect to respond to any of the substantive arguments with substance, but with emotion and rhetoric, and dishonesty.

Downsouth, I’m not sure where to start. You answered by simply restating the same nonsense.

1. Read the Selfish Gene. Actually read it. You haven’t. Until you have, just shut your trap about things you don’t understand.

2. Tell me PRECISELY which of the numerous talks and presentations at the Beyong Belief conferences contain a glorification self-interest and in what way.

3. Tell me, in what way the arguments of Dawkins and Dennett and Harris constitute a promotion of self-interest. Simply stating that they do and then, when called on your bullshit, restating the same false claim, is not particularly convincing. I don’t think you can, since you’re knowledge of Dawkins, Denett, Harris and so on seems to be based on mere hearsay.

I don’t quite understand your New Atheism thing. Please stop trying to shoehorn them into some bullshit “greed is good” school that you just made up. This is not the first time you did this.

Dawkins merely argues that there is an evolutionary explanation for morals and altruism. And Harris… greed is good school? Seriously? The guy is constantly arguing that we should try to empirically understand what constitutes human happiness so we can actually have a reasonable debate about what’s moral and what’s not – without having to resort to ancient admonishments from idiotic “Holy Books”.

You’re utterly mischaracterizing what these people have written and said. There point isn’t that “greed is good”, their point is that reality is a human trait arose independent of religion and has been coopted and twisted by religion. Religions is just a piss-poor source of morality and that’s the gist of their argument.

As a consultant for a small outfit that specialized in industrial work back in the ’80s, “morality” was never a concern. Our job was to show that, by hiring us, a company had performed due diligence and was free to go about implementing whatever projects it wanted. Consequently, there was major incentive to figure out what it was the clients wanted to hear, and then tell them. That was how we “built relationships.” There was a further economic incentive: On those rare occasions when we had to issue a report questioning the client’s interpretation of reality, said client would inevitably come back at us saying our information was incomplete, and would we please go back and look for more data. Needless to say, this additional work tended to reduce the margin on the job significantly.

That describes the situation perfectly. I was junior IT management in late 70’s early 80’s when we were subjected to a Mckinsey consulting group. A bunch of arrogant know nothings if there ever was. I finally asked ‘how they slept at night’ and was told ‘just fine, the people that hired us believe anything we tell them’. Our most junior staff knew more about computing and organization than any of the newly minted consultants. They just did not own the $500 suits…

Agreed most junior staff and middle management know more about fixing whatever problem Mckinsey is brought in to solve. The problem though, isn’t $500 suits.

It is the fact that they are too busy being downsized, offshored and “doing more with less”.

Pay these people half the fee of Mckinsey, let them dedicate all of their time and have access to the C-level exec’s and the output would at least be equal for half the cost. My money says nine times out of ten it would exceed by factors of ten.

I suppose these characters have their historical counterparts in the rafts of dimwits, hangers-ons, sycophants and earnest proselytizers of the au courant form of non-thiking of the day who manned the enormous bureaucratic gears of the Byzantine empire, when it had gears to man.

there was an albatross called empire and it needed to be fed and in the feeding was also the bleeding and the draculas hung around waiting for the drops to fall.

Of course, there are a non-trivial handful of these personalities who know just what the game is, but have the shallowness of spirit needed to feed on it like they’re now feeding in London on that absolutely nauseating notion of human breast milk icecream.

Who can someone think of that without an suffering the involuntary throat tightening and muscular stomach wall undulation that precedes a projectile vomit? I sure can’t.

What is the difference between what these dudes and women do and feeding ruthlessly and predatorially on someone’s breast milk? If you’re a baby it’s understandable. But if you’re a man or a woman . . .

I am just an engineer and have never had much love for MBAs and management consulting firms. Over the years, their input has been at best neutral and at worst company-endangering at the various companies that I have worked for.

About 20 years ago, our office manager quit at a consulting engineering firm that had been bought by a conglomerate. I never did figure out why the congolmerate bought us because it was clear they had no idea what our business actually was. I am sure that some management consulting group told them it was a great idea.

Anyway, management brought in an MBA from the outside to help teach us how to run our office. He spent the next 6 months at corporate lobbying to be promoted to regional manager, which he eventually got. Meanwhile, we continued to run the office’s business.

The amusing part was that he apparently didn’t realize that he was promoted to turn another office around in the region. Our office had been doing fine before he arrived and after he was promoted. He blended many of the processes in the region but corporate still looked at office profits. Since our office did much of the marketing for the region, his management changes meant that we were selling work and booking it in our office. Meanwhile we were increasing work for the office that was to be turned around but his internal process changes meant that they retained the costs and lost the revenue to us. Needless to say, the paper profits of the other office only got worse and he was fired within 6 months.

Meanwhile, the various management consulting firms were providing lots of advice to the conglomerate management about how to turn around the overall conglomerate that saw its share price fall 90% over three years. They never figured out that the congolmerate had bought several firms like ours across the country but had never taken even the most basic steps to link these companies. I knew that some of these other companies had valuable technical resources that I could sell to my clients but I had absolutely no mechanism for doing that and in fact it was discouraged. We had the people and the opportunities in hand to make something real out of the various companies but management and its various consultants didn’t realize that this was what clients actually bought.

As a result, the brilliant management practices of the company and its various management consultants resulted in the entire entity becoming less effective than the sum of the parts it had bought and the whole shooting match was sold for about 10% of the original purchase price of the various companies about 7 years after it’s major expansion. I was already 2 years out the door working at a different company when it finally collapsed in a heap of dust.

From what I understand McKinsey runs a 6-year treadmill from being hired to making a partner with 2 intermediate steps in between. Naturally, very few entrants ever make it to being a partner: the average lifespan in McKinsey according to a McKinsey partner is around 3 years. These rather short-term associates are the ones who do the work, and learn on the job. The firm now hires not only MBAs, but MDs and PhDs from top universities. The pitch is that McKensey is the ultimate resume builder and the springboard to the upper and middle level management, and that ‘they’ will take care of you. The company is now moving aggressively into consulting to state and local governments. For example, it just ‘figured out’ how to prepare excellent teachers.

My little sister works at the Dallas office, she says the term is “up or out” or something like that. Basically, either you’re working toward partner or you’re out. The only other thing i’ll say about Mckinsey is, having hung out there for lunch a few times with my sis, the break room is really nice.

Agree with all of Yves’s points. However, it still doesn’t explain what RG was up to; he is not a pathological person, and the money/status doesn’t even start to explain it (he was probably much higher status than Raj)

I could believe the idea of that fat ass being a billionaire could upset him.

Also I could see some elements of blackmail.

RG big downfall at McK is turning it into corporate psychology instead of a law firm. That means lots of money to top partners and less for everyone else.

Based on what the SEC put out in the complaint, the evidence is damming.

However, it is just based on wiretaps. They have had it for close to a year. This is a big fish, the US attorney in NYC likes big fish, and why couldn’t they bring criminal charges? This is only a civil complain.

I’d understand a civil settlement if they got Gupta to turn and give evidence, but nothing like that pops up. So again, is the evidence so strong? Timing of phone calls is circumstantial, but there is enough (if true) to meet grand jury standards of bringing a charge.

So there is more than an outside chance the SEC’s case is not as strong as they portray.

(Raj has indicated his theory may be that Anil Kumar and RG were involved in a private consulting arrangement (ouside of mcK) which explain the phone calls. Not Raj’s business of where RG got the information. Although one would think the Goldman board stuff is fairly public (i.e. a board member calls you the same day as meeting MIGHT be material)

Passing around inside-information and war stories is a huge part of the sales pitch McKinsey partners make when they are wooing consulting clients and “developing relationships.” They convince the marks that they will bring deep insight from cross-client experiences beyond what the potential client could possibly get any other way.

I saw many cases where teams were asked to deliver benchmarks and best practices in situations where there was no ethical way to do so.

The clients don’t worry about being subjects of war stories, themselves, because they tend to be the sort of people who are looking to advance to new roles themselves, and aren’t that worried about their organizational secrets being leaked – or who are too stupid to think two steps down the road.

The other big sales trick – when outrageous fees come up – is to bitch-slap the potential client with a line like (to paraphrase), “Well, I’m not sure you have the [guts / cojones / juice] to hire expensive killers like us – maybe you should look at a lesser firm – and risk getting the answer wrong?”

But I digress. The short story is Rajat appears to have merely been doing what he always did to develop business – pass along sensitive gossip to perk up the interest of a counter-party – who in this case connected the dots and applied it in the markets. It wasn’t about immediate returns, it was about developing a relationship (for who knows what reason). It was about the titillation of dishing from a position of insider knowledge. It wasn’t calculated. It was merely obtuse.

The point about the foundational importance of McK’s trust and integrity is spot on.

When it comes to the quality of the McK’s advice, however, one should still try to be “fact-based” and not “anecdote-driven”: it is not the big blow-ups that matter but that batting average. All firms had spectacular screw-ups at one point or another. Firms that are involved in a variety of different things are more prone to blow-ups than firms whose products don’t change very much.

However, these performance data are impossible to obtain. I suppose it is very much like the old musing about spending on R&D or marketing: “I am pretty sure half of the money I spend is wasted. I just cannot tell in advance which half it is.”

“Why would someone with one of the most blue chip reputations in Corporate America, who has clearly done very well financially, risk it all to make a bit more? Not only is the downside considerable, but it also isn’t as if these moves would have made a meaningful difference in his lifestyle.”

Gupta risked nothing. His reputation will not suffer in the long run. Other than the embarassment of getting caught and maybe having to pay a fine, there will be no downside for the man. Avoiding the insider trading laws is an art form and a badge of honor. The only body that appears to care about insider trading laws is the SEC, and they only care sporadically.

Tao writes, “Gupta risked nothing. His reputation will not suffer in the long run.”

Amen. Yves asked whether clients would feel betrayed — for wife-beating, maybe, but for insider trading? Please! That’s like getting caught for gambling at Ric’s in Casablanca (“your winnings, sir”) and a certainly a badge of honor in NY’s snake pit; all but getting caught, of course, by the Keystone Cops at the SEC.

For utter stupidity, that MAY cause momentary embarrassment and perhaps a cost-of-business fine, but it’s hardly scarlet letter in this amoral business climate. I can’t imagine any bankster or hedgehog feeling betrayed, merely smug and superior for evading justice themselves. The Ministry of Justice has become a sick joke in Obama’s America.

I read this with some amusement. I spent 4 years with BCG in the 1980s as a freshly minted Stanford MBA. I’d say that the work broke down into three categories, roughly equal in size (measured by our billings).

First, CYAWP, where management wanted to do something (generally stupid)and needed the stamp of approval to push it through the board of directors. If the company was a long standing client or had the earmarks of one that might become a milch cow… we’d generally give them what they wanted. If it was clearly a one-off, we’d tell them what we thought (“Are you insane or just stupid?”)

Second, “I haven’t got a clue”. Usually a client with a new management team, often recently acquired, or just a new CEO who couldn’t figure out what the company actually did. These were easy – the classic saying about consultants borrowing your watch, telling you what time it is and keeping the watch. You could just trundle down the organization until you met someone who knew something or actually did useful work, ask them what was going on, confirm it with a few customers, suppliers and competitors, then package it up.

Third, “It’s not working”. These were the most interesting and usually the most frustrating. For whatever reason, the world has changed, and the levers that top managers used to use – and that brought them up to being top managers – are not effective any more. The interesting part was you could almost always find the answer by asking top managers how the business worked, then systematically taking every statement and seeing how many of them were provably wrong. (Since we were arrogant young pricks – myself included – these were hilarious presentations to give.) Frustrating because in the vast majority of cases… Nothing Would Happen. Nothing. “C level” managers could not believe that now their vaunted marketing or manufacturing or sales experience wasn’t worth anything, and that, oh, say… logistics had become the critical skill. “Logistics? Those guys just hire trucks and move stuff around! That can’t be right.”

So, eventually I left, although I was on the Partner track, to become a serial entrepreneur. (Lifetime record of 2-2-2) Much more fun, much more satisfying, and if I felt I needed another opinion, I just consulted my Magic 8-Ball. “Reply hazy, ask again later”. Easier, and probably the equivalent in “added value”.

I will say, though, that BCG had some astonishingly brilliant people who were a pleasure to work with. As well as some amazingly stupid people – who could generally sell very well which is why they were kept around.

“the classic saying about consultants borrowing your watch, telling you what time it is and keeping the watch.”

That is priceless, and my experience watching Anderson Consulting descend on my former employer years ago. Utterly fascinating to watch people come in, develop, and implement a plans, department by department. All input feed from base level employees to Anderson consultant to management.

The solutions to issues were simply feeding management what their own employees had been telling them for years.

Our company, while not a well oiled machine, was running better than most companies. Anderson C. after the second month removed their SR staff and replaced them with “newbies.” Our companies labor, white and blue collar, spent thier days off and on for 2 years TRAINING the Anderson greenhorns.

A testimonial of how tone def and out of touch Corporate Management can be, I don’t think management realized what their 5 million in fees, plus the costs of diverted internal labor really paid for. It never got though to them, ever.

Years later I was going on team expeditions with directors and VP’s, to resolve supplier issues (I worked for an equipment manufacturer). We were always hauled up to the front office for one of those non-productive “get to know each other” meetings that entailed shaking hands, and repeating what each party already knew.

When you ask to see their facility and speak with their shop floor staff – it was like a deer in headlights. “Why” was the typical response (As if by magic, the ceo in front of me was going to solve our problem, i mean, he hadnt yet to this point).

After some arm twisting we would hit the shop floor where I would remove myself from the walk though and venture away to start talking to employees in the area where the problem was. It was only at this time I could solve the problem.

Yes, the solution came from speaking to the people that make the product, the ones making only 8 bucks and hour and had no MBA. When subsequently explaining what we are having a problem with, and what or goal or need was. To which the responses would be something like, “oh, no problem, we could do this and this to resolve that”, “I didn’t know that was the issue” or “VP so and so said something totally different, I wish I had known that was the issue.”

It has been said: “It isn’t the problem you are presented with, but how you go about solving it, that matters.”

That was pretty much my experience as well (working in mostly technology consulting rather than strategy, but there can be a lot of overlap sometimes). Success as a consultancy was usually measured by the level of your relationships within an organization – the alpha consultant is the one that plays golf with the CEO. A company I used to work for had some run-ins with Andersen in which they took established business away from us, not because they could do it better, but simply because their relationships trumped ours. It’s possible that was just something we told ourselves to rationalize the loss, but our (below C-level) contacts at the client who ‘owned’ the project were saying the same thing, and were less than happy at being overruled.

Your last paragraph was my first thought when I read the Times list of actors. What country am I in?
2. In the mid 70’s my roomate in D.C. was hired as a consultant. When I asked what it entailed, he said, “Discover your client’s needs and prove it.” nothing about truth.
3. On a construction project, the owner railed against a plumber in a trench, when the owner left the plumber asked “What’s his problem?” I said, “He hasn’t spent enough time in the trench.”

McKinsey is also involved in advising school districts about how to get out of public accountability. The mayor of Los Angeles commissioned a report that led to his takeover of some local schools, and resulted in a bill in the California legislature that was found to be unconstitutional. When it comes to public policy, the firm is way out of its league.

McKinsey was hired to provide Clinton with the cover to permit outsourcing. The assumption as presented to Bill was “All outsourced employees will find a job paying equivalent or higher within one year.”

With regard to consultants and the latest financial crisis, this passage from UBS’s “Shareholder Report on UBS Writedowns” is tantalizing.

“[In mid-2005]… the consultant also noted that strategic and tactical initiatives were required to address these gaps and recommended that UBS selectively invest in developing certain areas of its business to close key product gaps, including in Credit, Rates, MBS Subprime and Adjustable
Rate Mortgage products (“ARMs”), Commodities and Emerging Markets. ABS, MBS, and ARMs (in each case including underlying assets of Subprime nature) were specifically
identified as significant revenue growth opportunities. The consultant’s review did not consider the risk capacity (e.g. stress risk and market risk) associated with the recommended product expansion.”

UBS doesn’t say whether the consultant was McKinsey or not, but it would be interesting to know which firm recommended aggressive expansion into sub-prime right as the market peaked.

I know quite a bit about what happened at UBS. McKinsey did make the recommendation, but it was more in the lines of validating what was already underway at the bank. The team in charge of that business appeared to be making stellar profits and was promoted at an extraordinarily fast clip. And what really blew up the bank was retaining AAA CDOs. UBS apparently required very low hedging under how it interpreted Basel II, which meant the CDOs could be used for bonus gaming. Pretty much all the Eurobanks did it, but UBS was distinctive in that it didn’t just retain the AAA tranches of CDOs it created, but went around buying the AAA tranches from other banks. This goes WAY beyond any strategic recommendation/validation of the subprime business and was a train wreck of particularly poor risk management meeting clever traders.

Mckinsey were employed by the British governments tax department. Her Majesty’s Revenue and Customs (HMRC) to design its new business processes and organisational structure. Since that time the Department which was once described as the “very heaven of the Civil Service” has been mired in endless controvery about maladministration (just Google a few press stories to find out). In the last staff survey of British government departments HMRC was ranked 103 out of 103 as a place to work. Mckinsey played a not inconsiderable role in creating this fiasco.

Perhaps the rot at McKinsey started in the New York office. That’s where partners drooled over Jeff Skillings’ success at Enron through the 1990s.

After I successfully managed a high-profile McKinsey engagement at the Bank for International Settlements, at any rate, several Swiss partners wanted to know why I wanted to leave the firm. I sheepishly explained my career-managing partner in New York, my home office, had gone to some length to build a case against promoting me in my first and only year there prior to my Swiss assignment.

But it seemed premature, especially in light of the Swiss decision to move me immediately into an engagement management role on my arrival in Zurich. Imagine my surprise a few months after the end of my Swiss assignment when I learned my career-managing partner had decamped to help run strategy at Lehman.

I was the only former Lehman banker in the New York Office at the time. You don’t suppose my advisor/tormentor had worried I knew of his discussions with my former Lehman colleagues and wanted to take a few preemptive swings at my credibility, just in case, do you?

In any event, said advisor, Jim Rosenthal, went on to add value to Lehman on a full-time basis. There he helped transform Lehman from the wonky bond house that had absorbed Salomon into an agile own-account mortgage-derivatives shop that tried to thrive, like First Chicago before it, on thin strips.

So at least one former New York McKinsey partner matched Jeff Skillings’ achievement.

If I can be presumptuous enough to speak for my peers we didn’t gasp, we groaned.

If someone that safe and secure calculated that the risk of getting caught for such a tiny trading thrill was negligible, then , well, we’re truly fucked and the game really is up.

Any last vestige of hope that our intellectual betters (and we do adore/hate those smarter than us ) share a fleeting moral compassion with us is shattered by this tawdy nonsense. This is actually worse than GS squidiness.

Its more demoealizing at least, We expect GS to screw us and averyone they deal with. McK is supposed to be above all that. at least marginally

A definitive post. The most “low down” per word of any I can recall. Clearly, you have attended the rodeo previously.

The biggest issue is the “decay of morals”, since it represents the destruction of our must valuable social asset, trust. It’s unfortunate we can’t quantitate it somehow, but it must convert at some point into a big, ugly number.

On a related point, I was trying to convey the gist of “ECONNED” to a bright businessman who hasn’t followed the subject closely, and I felt the need of a few aggregate numbers, like (1) total bad mortgages, or subprime, (2) total MBS layered on top, (3) total CDS in side bets. This could be broken down in several ways — time, whose books it wound up on, etc. It would allow a comparison with other crises, in particular S&L.

And what basis do you have for that charge? That assumes jealousy and/or anger, neither of which are present (although it is possible to misread my normal take no prisoners writing style). I left the firm when I was top rated among my peers. This wasn’t a case of being in any danger of being “out” in the “up or out”. I was willing when I joined McKinsey to be persuaded it was worth being partner there but quickly concluded I had no interest in that job, as incomprehensible as that clearly is to you. The notion of jealousy or anger appears to be solely your projection. Unlike virtually every ex-Mckinsey person I know, I continued to get referrals from the firm for twenty years after I left.

I’ve received only complimentary comments on this post from ex-McKinsey people (save perhaps you, I don’t know your affiliations), including former firm partners.

Sorry but you McKinsey people simply don’t get it. Even your critique of McKinsey can be summarized as “Mc Kinsey used to be great when I worke there”

The concept of management consulting is ridiculous. The idea of hiring an external party to tell you how to run your business within a 4 week time schedule is lunacy.

Consultants as therapists? It is precisely the CEO’s job to provide direction to the firm. If he lacks the clarity (or a specialist network sounding board) then he simply is not the man for the job.

Most consulting work is engaged for one of four reasons:
1) To gain an external perspective. The most rare, and only valid reason
2) Due to manager incompetence. Consultants hired to do the work that someone else is already paid to do
3) Consultants as throwing weapons. Using a McKinsey study to justify a project that affects other division and areas.
4) Outsourcing of responsibility. Using McKinesy reports to justify unpopular decisions or decisions that could backfire (career insuranc – yeah, we lost $500 million but McKinsey told me to proceed)

PS: McKinsey does not even recruit the best talents. The case study interviews are a joke; where does industry knowledge and sound logical reasoning come in? In my top 10 MBA they ended up hiring the most articulate and best connected. They were looking for people that could sell their product, not people who could deliver a quality product.

By the way. In a recent non-profit action my firm was going to participate with McK and the Gates foundation. We found McK had benevolently had cut their fees so as to only consume 50% of the $2M grant. They left no funds left to improve a very promising product that was being field tested (their role was only supervising the trial). We obviously chose not to participate as we did not think feeding $250k a year conultants to be in the best interest of our development policy.

Did you actually read the post? It appears not. I said McKinsey was deep into clients like AT&T and GM, failed managements that clearly never got better despite McKinsey ministrations, and cited a study (the FX example from London) which was a clear ripoff. You assume ex-McKinsey people are all cheerleaders and simply ignored what I wrote.

But the firm did recruit pretty much only from the top 10% of top MBA programs in my day, as did Wall Street. This is pretty verifiable if you’d bother checking that out. Regardless of what you think of MBA programs (I think they are overrated), it did give the firm cachet which was very useful in marketing.

I did read your post and you still don’t get it. This is not about individual failed projects or efficacy. Neither is it about whether practices have changed over time. My point is that the very institution of management consulting is corrupt and faulty at its origin. McKinsey, BCG, and Bain can basically only do evil because the service they provide almost exclusively caters to dark motives. Essentially, they provide cover for incompetent management and/or they serve as political weapons within the corporate environment. Both of these activities are value destructive to society.

And I do believe McKinsey people are cheerleaders. Many (not all) are undeservedly arrogant. As an institution, I have yet to hear of McKinsey dropping a key client, but I have no shortage of anecdotes of McKinsey (and other management consulting firms) providing politicized advice.

As I stated, I went to a worldwide top 10 MBA (and was top 5 percentile – yes, I interviewed). I know perfectly well that McK recruits from top MBA’s. My point is precisely that this is only done for marketing purposes… The McK recruitment process is in fact structured to select individuals who are able to spin a credible sounding story on a dime (which is the entire purpose of the case interview method).

(I do concede that McK has an “industry specialist” designation. These are the guys who are brought in to sell the project, but who only occasionally supervise the actual consulting team.)

The industry is a joke. Essentially, companies pay $3 million to have 3 associates (MBA’s right out of the gate) with only 3-5 years of work experience draft their corporate strategies within a 4 month period. The work is supervised by an engagement manager who basically sets the main tenor and supervises deliverable timelines. If the team gets stuck on an issue or datapoint they “guesstimate” it; aka. make it up. The theory is that being smart is all you need to understand the main nuances of an industry within this 4 month timeframe…

Is McK a good place to start your career? As they themselves pitch to prospective employees, it is a great place to learn. I have a feeling that is not the pitch they give to clients…

Please note. My comments do not apply to industry specialist consultants. These have a valid purpose in an organization that essentially subcontracts a capacity which it does not possess.

I have pointed out the conflicts VERY CLEARLY in the post, so I don’t get what your beef is. What about “McKinsey is the businsess of propping up diseased managements” don’t you understand?

Having said that, I can identify some particular projects that did add value, (which does NOT mean McKinsey added value across the client) and a very few savvy clients that understood how to deploy McKinsey well (Marriott was one; Sumitomo Bank, which McKinsey turned around after it took staggering losses in the 1970s, was another).

And as I indicated, this was not a corrupt model at the outset. There was a period when even strategy consultants had an analytical advantage over most clients.

On the merit of the AOL-Time Warner merger, it really depends on whether McKinsey advised AOL or Time Warner. While it destroyed a great deal of value for Time Warner, it certainly prolonged AOL’s existence.

AOL was an obsolete ISP, albeit a huge one. Without the dial-up revenue, AOL would have long gone the way of Lycos or Excite. The fact that AOL is still in existence is remarkable.

If McKinsey told Steve Case in 2000 that your stock will soon be worth less than toilet paper, buy something real with it now, then I think it would have been a good advice. Had Steve Case taken a page from Mark Cuban – the option collar – then he would be playing with his own NBA team today.

What is your take on the ‘advise then leave’ without touching the implementation (even eschewing it). I know that McK et al have built huge businesses using this model, but in the battle for IT strategy it seems that doling out advice is just the baby (you should do this). The larger fees appear to be in the bathwater (and here is how and here are some very geeky people who can assist).

They say that for every bug discovered in the garden a thousand more hide under the grass. Rajat Gupta is just the king bug, Anil, Enron etc. are some of the smaller ones.

Reading all this has revealed how to create a successful Management Consultancy organisation:

1. Proclaim great reputation and mantain it by lack of transparency i.e secrecy and justify its need by client secrecy needs.
2. Prepare glossy reports for companies by posing their unpleasant decision such as firing etc. as your recommendations to get company boards off the hook, and charge a fat fee for it
3. Do the same for competitors and share secrets across them
4. Then go on to trade on insider information gleaned during interactions.
5. Develop relationships for more Board positions
6. Do more inside trading and so on and so on until millions turn to billions